Banking sector to remain resilient as performance normalises after highs seen in FY2023-24, says ICRA

Banking sector to remain resilient as performance normalises after highs seen in FY2023-24, says ICRA

The Indian banking sector is expected to remain resilient as performance normalises after the highs seen in FY2023-24, said a report by ICRA while maintaining its positive outlook on the segment. This, it added, will be driven by comfortable asset quality levels, with both corporate and retail portfolios performing well in terms of delinquencies, resulting in limited net-NPA additions.

Furthermore, credit growth is expected to remain healthy at 12-13 per cent in FY2025 (16.5 per cent YoY as on December 1, 2023 and +15.4 per cent in FY2023), driven by strong demand in the services and the retail segments.

Aashay Choksey, Vice President, ICRA, said, “Incremental credit expansion has been robust so far at Rs 15.5 trillion (for FY2024 till December 1, 2023), against Rs 18.2 trillion in FY2023. However, as we look beyond this year, credit growth is likely to come off as tight liquidity conditions would eventually weigh down on growth. Besides this, factors including weaker credit demand in the agriculture segment, subdued export demand as well as the recent increase in risk-weights to the unsecured consumer lending and the NBFC segments would also collectively temper credit traction.”

Further, the gross-fresh NPA generation for the banking system is expected to witness a mild increase in FY2025 as portfolios gradually season, although the corporate book asset quality is expected to hold up and slippages are likely to remain granular. Despite the increase, the headline metrics of the banking sector would maintain an improving trajectory on steady recoverability and credit growth. Accordingly, ICRA expects the gross NPAs (GNPAs) and the net NPAs (NNPAs) to decline to 2.1-2.5 per cent and 0.5-0.6 per cent, respectively, by March 2025 from 2.8-3.1 per cent and 0.7 per cent, respectively, expected as on March 31, 2024 (GNPA and NNPA at 4.0 per cent and 1.0 per cent respectively as on March 31, 2023).

Accordingly, credit costs are estimated to remain benign at 0.7-0.8 per cent of advances in FY2024-FY2025, in line with FY2023. This should allow banks to comfortably maintain their return on assets (RoAs) at 1.0-1.2 per cent in FY2024-FY2025 (1.1 per cent in FY2023). While the RoE is projected to moderate, it is likely to remain healthy at 11.5-12.7 per cent in FY2025 (13.7-14.6 per cent in FY2024E, 13.8 per cent in FY2023), thus meeting a meaningful share of banks’ growth capital requirements in FY2025.

While recent regulatory actions like an increase in risk weights for exposure towards unsecured loans and non-banking financial companies, and an eventual transition to the estimate credit loss (ECL)-based framework could have a negative impact on the reported capitalisation levels, however, the capital position for most constituent banks remains comfortable and well placed to absorb these impacts while continuing to grow their respective portfolios at a reasonable pace.

“As a result of healthy profitability levels and controlled net-NPA additions, the capitalisation and solvency profile for private and public sector banks continued to improve in H1 FY2024. ICRA estimates that despite recent regulatory changes around increase in risk weights for exposure/lending to unsecured consumer credit and the NBFC segments, capitalisation levels would remain comfortable with Tier-I capital of the banking sector at 14.5-14.9% as on March 2025 (14.4-14.6 per cent E as of March 2024, 14.4 per cent as on March 2023), while improvement in solvency levels would flatten out to 4-6 per cent in F2024-FY2025 (8 per cent as of March 2023),” said Aashay Choksey.

However, ICRA remains cautious over any material weakening in asset quality levels amid higher interest rates or an unanticipated impact from regulatory changes on banks, in addition to a slowing global growth, which can have a spillover effect on certain export-oriented sectors of the economy, and a tighter liquidity environment, which might exert higher-than-expected moderation in profitability margins.